The Dow Jones is currently valued at $24,000 and the 1-year Dow Jones Mini Future contract has a price of $24,750. Note Dow Jones future contracts are for 5 times the value of the contract price. The risk free rate is 3% per annum and the Dow Jones dividend yield is 0.75% per annum. You are managing a portfolio that is worth $15 million and has a beta of 1.25.

A) What position in futures contracts on the S&P 500 is necessary to hedge the portfolio?

B) 6 months have passed and the Dow Jones is now valued at $24,720 and the future price is now $25,100. What is our portfolio value of your portfolio with the hedge from part a?

answers

A) Short 152 future contracts B) Hedged Portfolio Value: $5,310,562.50

How do you derive these answers? Please show all work